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Empirical Methods in International Trade

Essays in Honor of Mordechai Kreinin

Edited by Michael G. Plummer

Internationalization of the world economy has made trade a key factor in the growth potential of nearly every nation’s economy. Hence, economists have become increasingly interested in the determinants of international trade and competitiveness. Empirical Methods in International Trade captures the many aspects of this trend in globalization through practical techniques well-founded in economic theory. The authors, comprising some of the most influential applied international economists of their generation, use cutting-edge models to develop empirical approaches to critical aspects of economic interchange. These approaches are developed and explained carefully with the goal of making them accessible to a wide audience.
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Chapter 12: NAFTA and the Broader Impacts of Trade Agreements on Industrial Development: When ‘Second-Order Effects’ Dominate

Robert K. McCleery and Fernando De Paolis


Robert K. McCleery and Fernando De Paolis 1. INTRODUCTION The genesis of this chapter is two-fold. On the theory side, we have read with interest the theoretical work of Arndt, Deardorff, Jones, Kierzkowski and others on the international segmentation of production processes.1 What follows formalizes some of the ideas first (to our knowledge) laid out by Clark Reynolds, on what he termed ‘production sharing.’2 This chapter is meant to be a first step towards looking at some of the empirical implications of that theory.3 We hope this line of research will ultimately contribute to both this largely theoretical discussion and the empirical debate regarding trade, foreign investment, wages and jobs.4 Second, we have been working on and reading NAFTA retrospectives for several years. Many reviews seem to paint an exceedingly bright picture of both NAFTA’s impact on the member economies and the forecasting success of NAFTA modelers.5 We feel that these assessments largely overstate the success of the predictions, particularly in a microeconomic sense of predicting ‘winners and losers’ at the sectoral level, and hence overstate the discipline’s understanding of the impacts of PTAs (preferential trade agreements) in general and NAFTA in particular. Modelers can only be deified if we compare those modeling forecasts to straw men such as predictions made by Choate and Perot. To make an analogy, this is like crediting modern weather people for making better forecasts than people with signs predicting the apocalypse, even though their sophisticated methods performed somewhat worse than the prediction that tomorrow’s...

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